Aggregation and euro area Phillips curves

Abstract

This paper examines the issue of the impact of aggregation in the empirical analysis of euro area labour markets.A Phillips Curve describing the adjustment of unit labour costs is estimated at the national and aggregate level for the 5 largest euro area countries.Potential sources of aggregation bias are investigated -such as differences in parameter coefficients and a lack of correlation in the independent variables across countries -as well as the potentially offsetting statistical averaging effect.Finally the out-ofsample forecasting performance of both approaches is evaluated.The results point to some limited advantages of analysing wage developments at the national rather than at the area-wide level.The paper concludes that if major advantages in undertaking national analysis do exist, they are likely to arise from the ability to develop country-specific structures for the Phillips Curves and not from aggregation biases that emerge when a common structure is used.

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